RESPECT THE HEADLINES, DO NOT FEAR THEM
The negative headlines are increasing, and we are likely to encounter economic headwinds or outright recession in the near future, (if we’re not already there.)
If you’ve never been through a recession, it can be scary, particularly if you’re not prepared. Things seem to fall apart all at once.
Previously easy property sales are now hard, and sometimes you can’t sell it for enough to pay off the loan. Lenders suddenly get overly picky about your financials and if they agree to lend you money, they demand much more equity to purchase a property.
Prospective tenants are no longer flocking to your door because many of them have been downsized and no longer have income. Those that still have jobs have become more cost-conscious. You stop raising rent and, in some cases, you offer free rent for a month or two to entice them to live in your building.
It’s hard to buy; it’s hard to sell; it’s hard to get financing; it’s hard to produce cash flow.
OPPORTUNITY KNOCKS – GOOD THINGS ARE HAPPENING
While you should respect the negative headlines and always do your research, try not to let them paralyze you. There are a lot of good things happening and there are always opportunities.
I don’t know how bad this will get, but I choose to search for opportunity, and I believe it is available to everybody.
Though things have slowed from the frenetic pace of 2020-21, the metrics in the multifamily world are still promising. There is a current deficit of 600,000 multifamily units in the U.S., according to the National Multifamily Housing Council. This is part of the 4.3 million units needed between now and 2035.
PEOPLE STILL NEED A PLACE TO LIVE
Real estate is regional, and up to 40% of those new units will be built in Texas, Florida, and California. Two of those states have healthy, landlord-friendly tenant laws. My firm does business in Florida and Texas. (I’ll let you guess who has the least friendly landlord laws.)
So, while rents may not increase at the rate they did over the past two years, the demographics support rental housing in many areas, including those three states.
Rising interest rates will surely cause some cap rate expansion and lowering of values. If you’re a flipper or seller, this could slow your business plan. If your cash flow covers your expenses, you should be okay. Eventually, the pendulum will swing back, and your property will rise in value again.
I encourage you to stay the course if you are in the multifamily world. Currently the demographic data shows a strong runway for this asset class, if built or bought in the right area and with the right terms.
But be aware – not every deal is a good one. Be diligent in your evaluation of these opportunities.
ADD EXTENDED STAY TO YOUR PORTFOLIO
I also encourage you to keep your mind open to other assets and asset classes. There are other investments that you can add to your multifamily portfolio.
For instance, one real estate asset that is quickly gaining attention is the Extended Stay (ES) hotel. Did you know that over 70% of ES guests reside for over 30 days, and many stay for a year or more? These folks are paying hotel rates! Guest profiles include people in education, military, construction, corporations, health care, and those that are simply relocating but don’t yet have a permanent residence.
The ES profile is cost-effective for the guest profiles listed above because long-term leases are not required. Conversely, nightly rates are high and can be adjusted quickly as the economy changes. This gives the owner the flexibility to adjust down in tough times, or to take advantage of higher rates when times are good.
There is enough meat on this bone that Blackstone, one of the world’s largest real estate holders, has invested $1.5 billion over the past two years into Extended Stay. Maybe something to research?
Other assets have a history of strong relative performance during recessions. Consider alcohol, legal marijuana, self-storage, and enterprise software, to name a few.
WIN THE GAME
Many of you are out there doing great deals as we speak. That’s the way it should be. There is always a great investment to be made, no matter what the state of the economy if you know where to look.
Navigating a recession can be a game, but it’s one you can win.
You must be cautious with your underwriting and make provisions for worst-case scenarios. Build in buffers. Use lower leverage. Fix your debt. Find someone to lean on who has been through this before.
Protect your capital. Measure twice and cut once. Partner with experience. Recognize opportunity.
My goal is to help you keep one eye on the present economy, and one on the opportunities available. There are always two sides to the coin, and it will benefit you the most if you can see both sides at the same time!